Keeping the lights on, the emissions down and ‘investors’ interested

The UK government’s recently-published Energy Bill aims to massively reform the electricity market to enable large-scale investment in low-carbon (and affordable) generation capacity between now and 2020. In the face of long-term rising demand, security of supply and ‘keeping the lights on’ is its primary objective (along with cleaner electricity). To replace generating capacity and to upgrade the electricity infrastructure, the government is looking to stimulate investment of around £110 billion. The Electricity Market Reform Energy Bill – its full title – therefore contains a number of measures designed to provide investors with the necessary transparency, longevity, certainty and incentives for them to invest.

In very broad terms and from a renewable energy investors’ perspective, the measures include a Feed-In Tariff (FIT) with contracts for difference (CfD) subsidy scheme – designed to guarantee revenues even if market prices dip – and a new state-owned company to act as a single counter-party to CfDs with low-carbon generators. The measures also include powers for the government to promote competition and liquidity in the wholesale electricity markets (if proved necessary), a ‘capacity market’ to secure future supply (e.g, it is profitable for thermal generation to switch on as a back-up during high peak demand) and transitional arrangements for continued investment in energy infrastructure while the reforms are taking place. The subsidy scheme will have a further £7.6 billion pumped into it between 2015-2020, on top of the £11.8 billion earmarked by the government for 2011-2015.

These reforms represent a massive overhaul of the electricity market and, in essence, should help create a robust support framework, reduce uncertainty and put downward pressure on the cost on capital in the renewable space…but, for investors, the devil will be in the detail.